News ID: 255221
Published: 1152 GMT July 03, 2019

Turkish inflation respite starts countdown to first rate cut

Turkish inflation respite starts countdown to first rate cut
KOSTAS TSIRONIS/BLOOMBERG

Turkish inflation cooled more than forecast to the slowest in a year, bringing closer the start of a monetary easing cycle.

A moderation in food and energy costs, alongside the effect of a high base of comparison, are propelling the slowdown that began three months ago, with inflation projected to approach 11 percent this quarter, Bloomberg reported.

Data on Wednesday showed the annual rate reached 15.7 percent from 18.7 percent a month earlier. The median of 22 forecasts in a Bloomberg survey was 16.1 percent.

Now that Istanbul’s contentious elections are out of the way, the strength of disinflationary momentum could clinch a cut in interest rates when the central bank meets in just over three weeks. On pause since September, it struck a less hawkish tone at its last two decisions.

Gains in the lira, the world’s best performer since the start of May, will probably reinforce the confidence among policy makers that the time is right to resume easing.

“We see the spillover from lira weakness on inflation is fizzling out,” said Okan Ertem, senior economist at Turk Ekonomi Bankasi who had the most accurate forecast of June prices.

“Our year-end inflation estimate is 16 percent, but if the lira remains strong we may revise down our estimates.”

Economists brought forward their expectations for rate cuts and predict the first move already this quarter, according to forecasts compiled by Bloomberg.

Adjusted for prices, borrowing costs in Turkey are already among the highest in emerging markets. The gap between the benchmark rate and price growth is now at its widest since at least 2011, according to Bloomberg Economics.

The takeoff in Turkish inflation last year started in June as the lira’s slide fueled price increases. The currency’s fortunes have reversed, especially after President Donald Trump indicated the US may reassess a threat to sanction Turkey over its purchase of a Russian defense system.

More than two-thirds of the decline in June’s annual inflation can be attributed to slower increases in food costs, which grew at the weakest monthly pace since August 2016. Food and non-alcoholic beverages make up nearly one quarter of Turkstat’s inflation basket. Gains in energy prices decelerated by more than two percentage points to 10.5 percent last month.

Distorted by the high base last year, the outlook for Turkish prices remains volatile, according to Commerzbank AG.

“Once the base effect fades, inflation will likely reaccelerate,” Tatha Ghose, an analyst at Commerzbank in London, said in a report before the data release.

“This remains the major risk factor for the lira.”

 

 

 

 

 

   
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Resource: Bloomberg
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